Forecasting the Future of Cities Under President Trump

Campaign rhetoric can give us insight into a politician’s perspective, even after they take office.

This is a guest post by Dr. Michael Pagano.

The 2016 presidential campaign rhetoric was laced with mischaracterizations of cities, even as we have come to understand the importance of cities and metro regions as the nation’s key economic drivers in the 21st Century. Yet, campaign rhetoric and the candidates’ statements do speak to an understanding of each candidate’s perspectives on cities and their connections to the federal government.

Rather than work through the list of proposed people-based programs and estimate their potential city impacts, let’s take a look at three broad federal policy areas that will certainly be (or already have been) addressed by the Trump Administration and that clearly have a place-based dimension: infrastructure, tax reform, and sanctuary cities.

America’s infrastructure needs attention. While much is still unknown about the future of infrastructure in American cities, there are some indications of where we are headed. (Getty Images)

Infrastructure. The American Society of Civil Engineers (ASCE) grades the nation on its infrastructure deficit, and the latest report card isn’t pretty. A failing or near-failing grade is commonplace, and ASCE estimates $3.6 trillion as the infrastructure deficit – a staggering shortfall.

Although President Donald Trump’s infrastructure plan is still being shaped, the role that cities play in designing the infrastructure plan – and, more importantly, the extent to which the Trump administration will focus on local infrastructure needs – is not entirely known. But here’s what we do know:

First, it is clear that the Trump Administration will call on public-private partnerships (PPPs) to boost spending by $550 billion (and up to $1 trillion, as he proposed during the campaign). In confirmation hearings, Trump’s nominee for DOT Secretary, Elaine Chao, raised the prospects of PPPs to rebuild the nation’s highway system. This kind of PPP activity tends to be unattractive for fixed assets that are ‘jointly consumed’ (e.g., city hall, courts, police stations, fire engines, parks). Shared assets are hard to price according to use, and it is equally difficult to assign a ‘fee’ for their services. However, the more cities can benefit from PPPs (e.g., bridges, water, transit), the more freed-up capital they will have for ‘jointly consumed’ public assets. PPPs may be tempting for cities with massive infrastructure needs and backlogged maintenance projects, but cities should move cautiously to assure that taxpayers’ investments are secure and treated the same as private investments.

Second, infrastructure investment can be for creating new projects as well as maintaining existing structures. Although politicians prefer to attend a ribbon-cutting ceremony to open a new building or bridge, it’s important to appreciate that both new construction and maintenance projects are necessary and spur local economic activity. And, given the state of so much municipal infrastructure, a federal plan should emphasize ‘maintaining’ these existing structures.

Third, if we learned anything from the 2009 federal government stimulus grants, it’s that infrastructure block grants delegated to states don’t always trickle down to the local level. Cities often know their infrastructure needs better than states do, so cities should be offered the authority and responsibility to decide on the infrastructure projects that they find critical to their economic development strategies.

Tax reform could have repercussions for cities’ abilities to finance local projects. (Getty Images)

Tax Reform. Whether it’s massive, like the 1986 Tax Reform Act, or just incremental, cities will feel the impact of any potential tax reform. President Trump has said in no uncertain terms that the tax brackets need to be lowered. And although he hasn’t embraced it, there is also talk of eliminating the tax exemption on municipal bonds. Coupled, these two ‘tax reform’ initiatives could reduce municipal issues, which means fewer city-financed infrastructure projects as the costs of infrastructure rises.

Elimination of the tax-exempt status of municipal bonds would reduce the value of bond issues, as the interest rates would increase to compete with the corporate sector for capital. The municipal bond market would most likely require a premium from municipal issuers that, assuming all other things equal, could possibly raise the borrowing costs to cities by some 2 percent more or less. A 200 basis point penalty would probably diminish the volume of municipal bond issuances.

A second tax reform proposal would reduce both the individual and the corporate income tax rates. There appears to be little disagreement that tax rates will be reduced, but at what cost? If the tax-exempt status of municipal bonds is preserved, lowered income and corporate tax rate schedules could reduce the attractiveness of tax-exempt bonds. Reducing the top marginal tax rate from 39.6 percent to 33 percent or lower would require the market to increase the interest rates on municipal bonds to compensate investors. City investment in infrastructure would most likely fall.

Sanctuary cities. Many of the nation’s largest cities have declared themselves sanctuary cities, by which they mean that they have chosen to limit the voluntary role cities play in federal immigration enforcement.

Under the U.S. Constitution, immigration is a federal (as opposed to state or local) responsibility. Although cities may choose to cooperate with federal authorities, these cities argue that they will not divert city resources to fulfill a federal responsibility. Cities that have declared themselves as sanctuaries do so from a variety of positions. Philadelphia, for example, refers to itself as a 4th Amendment city, meaning that the city refuses to hold persons without a warrant.

President Trump’s Enhancing Public Safety in the Interior of the United States executive order, signed earlier this week, directs his Secretary of Homeland Security and Attorney General to prohibit federal grants going to cities and other jurisdictions that do not comply with their interpretation of immigration enforcement law. In other words, President Trump appears to be trying to “make good” on his promise to shut off federal funding to sanctuary cities. While it remains unclear which and to what extent cities will be affected by this order, it very well could spur enormous consequences if it emboldens Congress to amend legislation governing the distribution of federal funds. Reconsideration and passage of legislation similar to a failed bill that was introduced in 2016, called the “Stop Dangerous Sanctuary Cities Act”, would wreak considerable havoc for cities.

Chicago, for example, receives nearly $1 billion from federal sources, as does San Francisco; New York City’s federal revenues amount to $7 billion. One estimate of withdrawing federal funds to Chicago and four sister agencies of the city places the impact at some $3.6 billion. And other sanctuary cities receive funds, ranging from federal COPs money to CDBG, which could be in danger if Congress approves.

Even should the penalty for being a sanctuary city be restricted to just ‘policing’ grants, as has been proposed, the impact could still challenge the financial stability of cities. And given cities’ fiscal positions, withholding any federal support would trouble cities. City finances have yet to rebound to pre-Great Recession levels.

An Urban Agenda?

President Trump has other people-based proposals that will have an urban impact, such as reforming primary and secondary education, modifying federal housing programs, and overhauling the Affordable Care Act – but these are broad social issues that affect people residing in cities and rural areas alike. Yet, because the majority of the U.S. population today resides in cities, shifts in these policy areas will disproportionately impact local governments. Any people- and place-based proposal that affects cities or city residents will affect the health, safety and welfare of the American people, and they will affect the nation’s GDP.

Cities are resilient, and cities can adjust to these and other shifts in the federal landscape depending in large part on how much local autonomy they possess. And the relative capacity of cities to adjust to changing circumstances is governed by states. Resiliency depends in large part by how much decision-making authority states allow. Given the numerous policy arenas that Trump has said he will change, cities need to be nimble. To be nimble, states must work with cities so they can adequately adjust and continue to be the economic engines of the nation.

About the author: Dr. Michael Pagano is the dean at the University of Illinois at Chicago’s College of Urban Planning and Public Administration. Follow him on Twitter @MichaelAPagano